Much has been written and said about wills, trusts, and other estate planning tools and strategies for distributing assets to heirs. And yet there will always be those among us who prefer a different approach to bequests. If you’ve been thinking about giving your heirs their inheritance while you’re still alive to see them enjoy it, then you’re not alone. Many Americans choose that option, and for a variety of different reasons. Before you make any serious plans to give your estate away to your children and other beneficiaries, however, you should take the time to learn how the annual gift tax exclusion might impact your plans.
Why Gift While You’re Alive?
There are many reasons why you might want to give your heirs at least part of their inheritance now rather than wait until you’re dead. For example:
- The lifetime gift exclusion allows you to give a total of $5.49 million in gifts over the course of your lifetime. That figure is based on the estate tax gift tax exemption. When you take advantage of your annual exclusion for gifting, valuation discounts can reduce the worth of the gift for tax purposes. That can help to preserve more of your lifetime exemption.
- There are few things more rewarding than being able to see the joy that your gift can bring to loved ones. By gifting when you’re still alive, you get to see how each gift impacts the lives of those who receive it.
- When you give these gifts, you can often do so without tax concerns. That can help to address any inheritance tax issues that might be involved with gifts your loved ones receive after you’re gone. Though Indiana has no inheritance tax on the books, they could still be an issue if you have assets in one of the six states that do impose such a tax.
How the Annual Gift Tax Exclusion Works
The annual gift tax exclusion can be a great way to reduce the size of your estate and minimize any potential estate tax that might be due when you pass away. As a rule, gifts are viewed as taxable by the IRS, unless they meet certain criteria. That criteria includes:
- Gifts with a value of less than the annual exclusion amount. That amount is currently $14,000 per year for each individual recipient.
- Direct payments made to pay for another person’s medical expenses or educational costs. These gifts fall under the exclusion for educational or medical payments.
- Any gifts that you make directly to your spouse. All such gifts are exempt from gift tax consideration.
- Donations that you make to any political organization.
Under current rules, you are entitled to make gifts of up to $14,000 each year. Your spouse can also make a gift to the same person up to that limit, which means that the two of you can effectively give each recipient $28,000 in any 365-day period. In addition, there is no limit on the number of people to whom you can make such gifts. You can give up to that limit to one person, twenty people, or a thousand – if you know that many people and have those kinds of resources.
Using Gifting to Reduce the Size of Your Estate
For many people, using their gift tax exclusion now is a great option to reduce the size of their estate. In fact, it’s easy to see how a sustained strategy of gifting can help you to substantially reduce the size of your estate over time. For example, if you and your spouse each gift one heir the maximum $14,000 on an annual basis for the next ten years, you will transfer $280,000 of your estate assets. If you do that same thing for four heirs, you’ll have transferred $1.2 million in a ten-year period.
Of course, you might wonder why that’s important. After all, the estate tax affects only a tiny portion of estates each year, since relatively few families have estates large enough to trigger the tax. The fact is, however, that a future Congress could choose to lower the exemption once again. Or they could choose to lower the gift tax exclusion amount, leaving you with fewer gifting options in the future. Tax law is anything but set in stone – and estate tax laws have varied dramatically down through the years.
Because of that uncertainty, it’s always wise to make the best decisions that you can with the information available to you now. When there are estate planning options that can work to your benefit, it’s important to take advantage of them just in case the laws are changed by Congress again. And if there’s one thing that you can safely assume, it’s that the estate tax and gift laws will eventually be altered once more.
Proceed with Caution
Gifting, like many other aspects of estate planning, can be fraught with peril. The last thing that you want to do is proceed on your own without a well-conceived strategy designed to maximize the benefits to you and your heirs. The gift tax exclusion is like many other estate tax issues in that it is best used with the help and guidance of a legal professional who understands its complex rules. To ensure that you don’t receive any unexpected tax surprises, you should always consult with an attorney before using this exclusion or other tax exemption strategies like the marital deduction.
At Frank & Kraft, Attorneys at Law, our experienced estate and gift tax experts can help you to navigate through the complex maze of federal gift tax laws. We’ll work with you to develop the gifting strategies you need to make the most of all your exemptions, and assist you in your efforts to minimize your estate’s tax liability. We’re committed to helping you secure your interests and safeguard your wealth so that it benefits your family as much as possible. If you’d like to learn more about how our reliable experts can help you master the annual gift tax exclusion, call today at (317) 684-1100, or contact us at our website.
Mr. Kraft assists clients primarily in the areas of estate planning and administration, Medicaid planning, federal and state taxation, real estate and corporate law, bringing the added perspective of an accounting background to his work.